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CRE 2018 Year in Review – Silicon Valley

It’s no surprise that within a 24 hour time period the Silicon Valley real estate market can make drastic changes, dancing along the price, occupancy and inventory charts – let alone an entire year. Here’s a jam-packed list of the major headlines for Commercial Real Estate pertaining to Silicon Valley, California’s technology hot spot.

  • Facebook was responsible for the largest office lease in San Francisco for 2018. The social media giant leased over 1.1 million square feet in San Francisco, making it the third-largest tech tenant in the city following Uber and Salesforce.
  • Silicon Valley made for about 21% of the nation’s new office construction.
  • A collection of major retailers went extinct leaving business owners and real estate professionals to get creative with how big box spaces will be utilized in the future. Toys ‘R Us, Kmart, Sears, Macy’s, J.C. Penney, Walgreens, GAP were among the few to officially close many, if not all existing stores in 2018 as E-commerce steals the spotlight.
  • New building designs omit concrete in the structural framework in attempts to be more eco-friendly. Imagine the structural deficiency potential there – yikes.
  • Confident foreign capital continues chasing U.S. Commercial Real Estate.
  • High tech accounted for nearly 20% of office leasing in Silicon Valley in 2018.
  • High overall mature market growth in 2018, right behind Northern Virginia.
  • Senior Housing occupancy trends plummeted as independent living occupancy rates sky rocketed. Could this correlate with medical advances and the ability for the elderly to remain independent and healthier for longer periods of time?
  • Commercial real estate prices rose across a multitude of sectors/industries by about 7% compared to the same period last year, according to Real Capital Analytics’ Commercial Price Property Index report.

As the economy strengthens and the ever-anticipated economic correction surfaces, only time will tell what lies ahead in 2019 for commercial real estate in Silicon Valley.

Types of Commercial Leases

One of the most important aspects of managing commercial real estate includes understanding leases.

A lease is like a partnership. It outlines how the business relationship between the lessor and the lessee will proceed. Following are some types of commercial leases that you, as an investor, may encounter.

The Triple Net Lease (which is abbreviated as “NNN” in advertising) is used extensively in commercial real estate. It is popular for multi-tenant and single-tenant industrial and retail properties.

The three elements—the “triple”—are Taxes, Insurance, and Operating Expenses. In a true NNN lease (and many so-called NNN leases are not “true” NNN), the tenant pays a basic rent to the landlord, and in addition pays ALL the operating costs of the property: the real estate taxes, all the insurance premiums, and all the operating expenses—from utilities to maintenance contracts, pest control to security. The tenant is responsible for everything under this form of commercial real estate lease.

In a single-tenant building, many if not all of these costs will be directly paid by the tenant. Even the tax bill will be invoiced to the tenant. In a multi-tenant building, it is more common for the landlord to be invoiced for at least some of the operating expenses (taxes and insurance at least) that will be collected, often monthly, from each tenant according to their prorated share. This separate collection is often called “CAM,” for Common Area Maintenance (although it may include non-maintenance items such as insurance and real estate taxes).

A Gross lease, sometimes identified as a Full Service Lease, in its pure form has the tenant paying a single flat sum each period to the landlord as the total rent, with the landlord responsible for all costs of operation of the property. A one-night stay at a hotel is such a lease, as are some short apartment leases.

More often, Gross leases should be called Modified Gross, because under their terms a tenant will be required to pay some of the operating costs (electricity, water, cleaning, for example), and/or the rent each year may increase by the amount that the operating costs—or the tenant’s share of them—have increased in the previous year.

Like anything else in real estate, it is important that you understand the agreements and the terms before entering into a deal. Understanding commercial leases isn’t as difficult as performing brain surgery, but you need to do a little homework all the same.

Source: Commercial Property Advisors